The Impact of Deterrence on Undeclared Work

Given the mainly descriptive evidence in the previous chapters, the most important question is whether a policy of deterrence is actually a suitable means with which to fight undeclared work in Germany. The German Federal government and in particular the German Finance Ministry is convinced of the effectiveness of such policies. As outlined in the introduction and in Chap. 4, deterrence has increased across time in Germany. A whole sequence of steps has been carried out in order to raise deterrence levels considerably. Such initiatives are founded on economic theory according to which the risk of sanctions and the size of fines are expected to have a significant impact on tax evasion and thereby also undeclared work. In this chapter we look into whether this is the case.